Asserting State Responsibility Over Transportation Financing

» States already generate the majority of transportation revenues locally, so perhaps the imperative for increased spending should come from them rather than Washington.

One of the frequently undermentioned aspects of the transportation funding debate is that while the federal government’s Highway Trust Fund is the source of a significant percentage of overall highway and transit expenditures in the United States, state departments of transportation raise most of their money from local sources. For advocates of alternative transportation, whose focus has been almost exclusively on policy in Washington, this fact should serve as a wake-up call. In order to produce truly effective change in the way Americans get around, it will be necessary to promote changes in the way states collect revenue for and spend on transportation.

An examination of the taxation sources used by states to fund transportation is in order. I’ve taken Oregon and Illinois as examples here; further comparisons with other states may be useful in the future. I’ve also excluded from this brief review municipal, county, and regional expenditures, which typically constitute the majority of public transit spending.

As the chart above demonstrates, these two states have very different transportation funding structures in addition to the revenue each receives based on formula grants from the U.S. Department of Transportation. Whereas Oregon relies on a diverse portfolio of funds, including a state fuel tax, a vehicle registration fee, bonds, and a weight mile tax, Illinois relies mostly on vehicle registration fees, with only about 12% of funds coming from a state fuel tax.

In each of those states, as in almost every state, the majority of overall transportation spending goes towards roads projects.

If the federal government were to completely alter the manner in which it collects funds in reaction to a slow decline in gas tax revenues into the Highway Trust Fund, then, it would only affect a minority of overall national transportation spending.

A movement towards a more progressive General Fund-sourced transportation system at the national level may well encourage an increasing effort by federal officials to promote transit and other elements of a transportation portfolio aimed towards “livable cities.” But if states continue to collect their own taxes with an emphasis on user fees, the vast majority of spending will continue to be on highways, since there is little political support to divert the majority of automobile user fee revenues to public transportation.

Indeed, this is one reason why it might be a good reason to funnel roads user fees into the General Fund, and then use the General Fund to pay for infrastructure through the Highway Trust Fund. The direct connection between user fees and transportation spending keeps the country dependent on automobiles, so cutting the umbilical cord could be a politically beneficial solution.

Eliminating that relationship could also paradoxically provide motivation for the gas tax increases that are desperately needed both to provide funding for new investments and to keep the negative environmental consequences of car use in check. Last year, at least fifteen states were seriously considering fuel fee increases, but only three were able to pass the expansions through their respective legislatures. By making the argument that the gas tax can fulfill government-wide needs, states facing desperate budget situations may find raising the fuel tax less difficult than increasing income tax collections, for instance.

Another point to emphasize here is this: Both Oregon and Illinois get only about half their transportation revenues from fuel taxes. The same is true of a number of other states, from North Carolina to Nevada. Other states, like Wyoming, are much more reliant on state and federal gas taxes. There are a wide variety of funding devices being used across the country, and state governments should make an effort to adopt successful taxation strategies from their peers.

Most states, however, get the majority of their funds from user fees of some sort: If not gas taxes, then vehicle registration fees or drivers’ license fees, which require everyone using a car to pay their part. This connection between direct “use” of the roads and spending — a link that ignores the fact that everyone, car driver or not, is a direct beneficiary of transportation spending — prevents state legislatures from investing fully in their rail and public transit systems.

The widespread adoption of public transportation in the United States is dependent on increasing spending for new investments; if the federal government cannot find an adequate source of new funds for transportation financing, the states — which already raise most money for their respective highway projects — may be able to. But without a strong push at the state level to make public transportation a priority, it won’t happen. And in a country where states are too often dominated by rural and suburban interest groups, it’s unsurprising that we haven’t many serious efforts in that direction.

13 Comments | Leave a Reply »
  • Ben Ross

    It’s mostly myth that state gasoline taxes are a user fee. Most states exempt gasoline from the sales tax. With gasoline at $3 per gallon, a 6% sales tax is 18 cents per gallon. The first 18 cents of the gas tax represent a diversion of general fund revenues to transportation. Only the excess of the gas tax above 18 cents is a user fee.

    In Maryland, and I think some other states, sales taxes on automobiles also go into the transportation fund. The state refers to these as user fees, but again they are a diversion from the general fund. The sales tax on a lawnmower doesn’t go into a lawn care trust fund.

    On the other hand, your chart doesn’t show any toll revenues. Tolls are a user fee, and I know Illinois has toll roads.

    I did an analysis showing that user fees pay a higher percentage of the Washington Metro budget than of the Maryland highway budget.

  • It’s mostly myth that state gasoline taxes are a user fee.

    In no small part because in many states, gasoline taxes are used as a General Fund revenue mechanism…going to things other than transportation. I believe there’s only a handful of states (Minnesota among them) where the state gas tax is dedicated (Constitutionally or otherwise) to transportation.

  • While I think it can be wise to borrow at times, I wouldn’t exactly call bonds a “revenue” source. Some northeast states have gotten into big problems whereby a good chunk of their “highway” budget is now dedicated to debt service on old bonds.

    Incidentally, Illinois did just do what we call a “capital bill” that is funding many billions in improvements via bonding. It’s not just roads, but there are a lot of highway and transit projects in there.

  • Mike

    Great post, Yohah; this issue — does the federal government need to be in the transportation funding business at all — really needs to be at the center of the discussion of the next federal transportation act. The Section 1909 Commission took a crack at answering this question and, while it identified some legitimate national priorities (HSR; goods movement; interstate maintenance) around which to organize a new federal program, it didn’t focus much on the idea that much of what the feds do in transportation can be taken up in its entirety by the states.

    I’m not surprised, however, that there’s no attention to scaling back the federal program and handing the rest back to the states. Congress, of course, likes the influence that it gets from controlling a vast expenditure program, and environmentalists like having a place to turn to when states don’t do what they want.

    • It’s been argued that Article 1, Section 8, Clause 7 of the Constitution is what gives Congress (and conversely the Feds) the authority to be in the “transportation funding business”, since that clause specifically gives Congress the authority to establish post roads (which was later expanded in that railroads are also considered “post roads”). Not saying it’s right or needs to be this way, but this is where Congress gets the authority to do so…

  • One element is increasing the range of automobile expenses covered by user fees. For example, a certain fraction should go to local police budgets. A certain fraction should go to public health care provision. A certain fraction should go to the general fund to reflect pollution externalities.

    The cost of the roads themselves are certainly less than half of the external costs of driving, so allowing over half of the user fees to go to roadworks is clearly subsidizing drivers.

  • I’m with Aaron. Bonds are not a revenue source!

    My American bank always sends me statements that show not the balance on my credit card, but rather tha unused credit that remains under my limit. They clearly want me to think of that as money I have in the bank.

    As we can see, too many people, and governments, have fallen for that illusion.

    • Bonds aren’t a revenue source for the government as a whole, but they can be a revenue source for the DOT, if the DOT isn’t responsible for paying back the loan, as is sometimes the case.

  • If only California realized that fallacy, Jarrett and Aaron.

    Also, the detachment of user fees in highway and road funding completely negates the argument by some conservative politicians that transit operating subsidies make it “fiscally irresponsible” to invest in new infrastructure. Their beloved highways are subsidized by general funds even more than most transit systems.

    The bottom line is that all transportation in this country is heavily subsidized by the government, distorting economic incentives for consumers. This is true of air, long distance rail, highways and transit. People would be shocked if they could see the true costs of getting around as much as we do in America, no matter the mode choice.

  • Adirondacker12800

    For example, a certain fraction should go to local police budgets.

    …. of course I can’t find a reference now. Something like 40 % of the police budget in urban areas goes to traffic control etc. In suburban and rural areas it flirts with 60% and sometimes goes as high as 75%.

  • Sam

    A point that needs to be mentioned here.

    In Oregon, all revenue from the state gas tax and vehicle registration fees (state and local) are constitutionally restricted for use in road construction and maintenance, and cannot be used for transit operations funding or capital investments. Add on top of the lack of a statewide sales tax, and the cost of transit falls almost entirely on local funding sources.

    Changing state DOT funding priorities is an important step, but in many states including Oregon, the first step involves the heavy lift of changing the state constitution to allow for the creation of 21st century multi-modal transportation systems.

  • Dorothy

    In the State of California the State Legislature titled Federal Highway funding for persons who could not afford to pay transportation fares to maintain employment and daily travel to the doctor, hospital, grecery stores, schools and colleges under the State of California State Public Utility Codes, Section 523. This has been since the year 1911, President Wilson era. Currently each ten years, the County of Los Angeles receives $25,000,000, 000, plus funding in addition to monies for the categorized persons stated, which is over $2,000,000,000 for Los Angeles County. Fifty percent of Public Utility Code money may be taken by the local bus company for other purposes if they agree to pay the money back within three (3) years. The categorized people never use any of the money. Veterans return from duty, wars, on leave etc. They are kicked off the bus, denied travel. This has been over 100 years of your giving money to state legislatures. Obviously, the local transport companies are using the money for some other purpose. In Los Angeles County, we had the Rapid Transit District bus which is now the administration for the Metropolitan Transportation Authorities which according to Standard and Poors is under Metro Goldwyn Mayor, a George Murphy type enterprise.

    I want the California Public Utility Code Section 523 which was so titled to prove the money from the Federal Highway Administration had been accepted-received by the California State Legislature in accordance with Chapter 13 of the Federal Highway Commission.

    In 2001-2002 Mean Date War Game activity,. the then U.S. Attorney General signed the State Public Utility Code 523 Statute page which was bound into the California State Public Utility Codes as well as the legislature as compliance.

    The present legislative authority admits each session to being a War Game entity.

    I am requesting the name(s) of the Certified enforcing agency with the administrative names of the U.S. Congress and State Legislature
    and local legislature be given to me. Please send to 245 So. Lucas Avenue, No. 215, Los Angeles, California 90026. Also, copy to my e-mail. Thank you.

    Dorothy Woodson

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